Hungry Asia: Constraints for Companies

Inefficient irrigation, pollution from agriculture, fertilizer use, land availability, water scarcity and diet changes all lend to more focus on environmental risks.

Increased transparency is crucial for investors.

Recent analysis by Responsible Research concludes that ESG disclosure by Asian food companies is ‘extremely disappointing’ and highlights water scarcity as a critical constraint for feeding Asia.

Results of Analysis by Responsible Research on Asian Food Companies

Analysis on Asian food companies’ ESG (environmental, social and governance) reporting reveals that they are worse than regional telecom companies and utilities.1 Large Asian-listed food companies score 28 per cent compared to 42 per cent for regional telecoms companies and 37 per cent for Asian utilities.

The research was undertaken by Singapore-based Responsible Research using its Asian Sustainability Rating (ASR) methodology to conduct the analysis on a universe of 41 large Asian listed food companies. The universe consists mostly of packaged food and meat providers but also several agricultural producers and food retailers. The ASR methodology comprises 100 proprietary sustainability indicators and can be viewed in more detail on the Responsible Research website.

In general, locally-owned Asian food companies lag subsidiaries of multinationals which aspire to head office standards on ESG reporting, management and performance. The 41 Asian companies were benchmarked against four of their global peers for purposes of comparison. A simplified table of the best three companies in each category is reproduced below:

Position

MNC leaders

Country

ASR Score

1

Danone

France

92%

2

Nestle SA

Switzerland

88%

3

Unilever plc

UK

88%

Average

89%

Asian MNC leaders

1

Unilever Indonesia

Indonesia

80%

2

Nestle Malaysia

Malaysia

70%

3

Nestle India

India

58%

Average

69%

Asian Food Leaders

1

Unipresident

Taiwan

62%

2

Charoen Pokphand Food

Thailand

60%

3

China Agri Industry

Hong Kong

42%

Average

55%

Source: Responsible Research

The report does not provide specifics on which companies have the lowest ASR scores, but summarises that Chinese, Indonesian and Philippine companies are the poorest at measuring and disclosing how they manage their ESG risks. Environmental disclosure is the worst with only 10 per cent of the company universe disclosing their GHG energy, waste and water data and ‘few of the Chinese companies2 scored any points at all for environmental reporting’. In general disclosure on social impact issues scored higher and corporate governance scored the highest.

However, the report highlights corruption in the Asian food sector as a major issue, using examples such as the Sanlu Group’s melamine-tainted milk incident in China in 2008, when the company and Shijiazhuang Government did not report the tainted milk immediately, a failure considered to be ‘closely linked to the seriously corrupted food quality control system in China’.

ESG Reporting and the Water Crisis

Why is ESG reporting important for this sector?The report explains in great detail that there is a multitude of intertwined environmental and social challenges for companies operating in the food sector in Asia. Increased transparency regarding how companies are dealing with these challenges, including the current water crisis, is crucial information for investors and stakeholders looking to back winners.

Specifically with regard to water, the results of the second investor-backed CDP Water Disclosure initiative later this year, whose target Global 500 companies list includes four companies from China, twelve from Hong Kong and Taiwan combined and a further fifty from Asia ex-Australia, will give an indication of how thoroughly Asian companies are starting to provide such water-related data to the global market place.

The regulatory status for environmental reporting in China is summarized in a table in the report as follows:

‘The 2008, Provisional Measures on Disclosure of Environmental Information required government agencies to disclose 17 categories of environmental protection information covering policies, standards, licensing processes and administrative approvals, as well as a list of businesses that have violated waste discharge policies. Companies in violation of local or national waste discharge policies are required to disclose specific environmental performance data such as waste discharges and the operational status of protection systems, in addition to publishing action plans for environmental emergencies.’

China’s Water Challenge and Feeding Asia

Water Scarcity

“The availability of clean, affordable water will affect corporate investments in agribusiness and livestock in the region. In regions such as north-western India and eastern China, water shortages will hinder growth of agriculture and productivity”

Feeding Asia, Responsible Research

Water scarcity is highlighted in the report as a major environmental issue for the food sector. It will be a key constraint to the supply of food in the region in future given that agriculture uses 70% of fresh water resources. For more information on the complex relationship between agriculture and water in China, which is relatively efficient in its water use at 62% of total water use, see the Big Picture.

A result of increased water scarcity will be the rising price of water. As it rises, which the report recommends it should in order to reflect the true cost of obtaining it, so will the price of food due to higher raw material costs and higher costs of packaging. With rising food prices often comes civil unrest – as was the case in India in early 2011. Julian’s Cribb’s sobering book, ‘The Coming Famine’, published at the end of last year, goes as far as to suggest that 10% of all military defence budgets should be diverted in order to feed our hungry planet, thereby preventing armed conflicts sparked by food insecurity or global warming migrants.3

Irrigation

Inefficient irrigation is emphasized in the report as a critical problem. This message is echoed in a recent Asian Development Bank (ADB) report on rising food and oil prices: ‘Many irrigation systems in Asia are in dire need of investments for modernization and are highly inefficient in water use.’4 A recent Water Sector Handbook published by Citigroup Global Markets puts a number on it saying that whilst irrigation is the number one use of water globally at 70 per cent, an estimated 55 per cent of irrigated water is lost simply through leaks and irrigation.5

Source: International Water Management Institute,“Comprehensive Assessment for Water Management in Agriculture”, 2007

Circle of Blue reported recently on the risks for China’s food supply explaining that despite droughts for each of the last five years, annual harvests have increased because extensive irrigation means that nine desert provinces in The Yellow River Basin now produce more than 20 per cent of China’s annual grain harvest. China’s geography and cultivation practices have shifted significantly over the last generation increasing the demands on water supply.

Toxicity

China’s water toxicity from agriculture is highlighted in the report as being the worst in the region. Several examples are given including the finding by the Ministry of Environmental Protection in 2008 that almost half of the 26 lakes and reservoirs under national monitoring programmes suffered from eutrophication and the fact that over one third of fish species native to the Yellow River are locally extinct due to damming in pollution –20,000 chemical factories, mostly along the Yangtze, are blamed for dumping only marginally controlled pollutants into China’s rivers. Although companies are fined for such behavior, the average US$14,000, at most once a month, is not enough to make a difference. For more information on the role of pollution in exacerbating water scarcity.

A summary of other issues for feeding Asia highlighted in the report

Supply issues

Climate change

Food productivity is generally negatively affected by changes in temperature and changing patterns of precipitation

Land availability

Productive land declining due to urbanization, degradation and biofuel production. During 1990s 70% of Asia’s land was deforested for use in agriculture causing soil degradation

Energy mix

Price of food and oil and closely linked, biofuels are input intensive

Fertiliser use

Needs to be increased to improve agricultural productivity but creates pollution and is water intensive

Fish stocks

Over 80% of global fish stocks are fully or over-exploited and 86% of fisheries or fish farmers worldwide are located in Asia

To achieve millennium development goals the amount of food available in developing countries needs to double by 2050 which will require significant government interventions

Shifting market opportunities

Changing diets means changing markets in, for example, convenience and processed foods and in cereals to feed cattle for meat production

Climate Change

Many of these other issues for the sector also link to issues with water. For example, climate change is said to bring about extreme weather patterns creating flooding of fish farms and increased water salinity, causing glaciers to melt which increases flooding and then reduces river flow as glaciers recede, causing droughts which dry up the wetlands, and so on.

Analysis by McKinsey and Company is quoted in the report and shows that the Chinese government needs to spend US$2.4 billion each year to 2030 to mitigate the potential effects of drought caused by climate change.

Circle of Blue reported last month that the Chinese government ordered the release of 600 million cubic meters of water from the Three Gorges Dam to the lower Yangtze River due to severe drought in an area that generates much of China’s hydropower. In addition, grain production on 870,000 hectares (2.15 million acres) of farmland has been affected by recent drought in Hubei Province—one of China’s largest rice producers.

Changing Diet

As well as climate change, changing diets are having a particularly significant impact on water. The report includes a table, reproduced below, showing how the growing taste for meat drives the agricultural demand for more water since current meat production practices require four times the amount of water per kilogram of meat than an equal amount of grain. The report also highlights that in 1985 China consumed an average of 20 kg of meat per person per year, by 2010 this was up to 50 kg and rising. This difference has been calculated as translating into an additional 390 km3 of water required per year, almost as much as total water use in Europe.

Product

Equivalent water (m3 per kg)

Fresh beef

15

Fresh pork

5.4

Poultry

6

Cereals

1.5

Citrus fruits

1

Palm oil

2

Pulse, roots and tubers

1

Source: The First World Water Development Report, data from 1997 FAO study

Report Recommendations for Addressing Asia’s Water Challenge in the Food Sector

A range of recommendations is peppered throughout the report for addressing social and environmental challenges for Asia’s food sector but the focus below is on those directly related to the water crisis.

In terms of water pricing, the report expects a restructuring to reflect the true cost of obtaining it. However, the authors highlight that care must be taken with government subsidies for water so as not to drive unsustainable farming practices such as overuse of water and fertilisers or risky monoculture. In addition, the authors recommend that farmers are encouraged to actively change agricultural practices so that crops are predominantly grown in areas with climates that suit their needs, for example sorghum in drought prone areas instead of rice or meat.

Most important is that irrigation systems are dramatically overhauled so as to reduce waster water and increase crop per drop. Much of China’s inefficient pipe network is known to be old, small, unlined and leaky despite its critical role in China’s grain production. Dr. Yangwen Jia, a chief engineer of the Institute of Water Resources and Hydropower Research, in a recent meeting with Circle of Blue stated that China is prepared to invest $US 60 billion (RMB 400 billion) over the next decade in irrigation and other water production and transport measures in order to help it increase domestic grain production by 50 million metric tons annually by 2020 (10 per cent more than 2010).

The report supports small rural farms on the basis that they tend to keep the land fertilized, biodiversity intact and soil nutrient levels high, as well as providing rural employment and slowing migration to the cities. This has been further explored and emphasized in a recent report on agroecology by Oliver De Schutter to the United Nations Human Rights Council. De Schutter states: ‘we won’t solve hunger and stop climate change with industrial farming on large plantations. The majority of the world’s hungry are smallholder farmers. The evidence shows that, using agroecology, these farmers can increase their food production to provide for their families.’ 6

Improved water management is also necessary to increase availability. The river basin management approach adopted for the Huai River in North China is cited as a good example. In 1972 for the first time the Huai River in North China did not extend to the sea and in subsequent years the problem worsened so a river basin approach was adopted and since 2000 the river has consistently reached the sea.

Other recommendations include improving packaging to help control waste in transit which should also consider the high water intensity of the paper and pulp industry; a nod to increased government spending on R&D and productivity innovation; and the assertion that genetically modified food must be carefully managed so that threats to biodiversity and herbicide/pesticide resistance are reduced as well as farming practices improved.

More generally, given the disappointing results of the new analysis on Asian food companies, the core message of the report is that companies must improve disclosure on ESG issues so that investors and stakeholders can have a clear understanding of how they are addressing water-related and other social and environmental challenges. The authors ‘expect Asian governments will follow their Western counterparts by gradually enacting regulations that require food companies to provide audited data on sustainability impacts, water usage, pesticide use, fair trade, GHG emissions and packaging recyclability’.

Louisa Mitchell is a freelance social and environmental policy researcher. She was recently a research director at leading UK think tank Policy Exchange, has contributed to publications for the London School of Economics and has written for The Financial Times. Prior to that she was the Director of The Whitley Fund for Nature, an international environmental award programme run out of the UK and was the first Director of ASrIA, the Association for Sustainable and Responsible Investment in Asia run out of Hong Kong. She was previously an investment banker working extensively in the US and Asia, particularly China. She read Oriental Studies (Chinese) at Cambridge University and has a Masters of Science in Social Policy Research (Methods) from the London School of Economics.
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